Monday, October 25, 2010

Maryland's Sustainability Commission has finally convened.Tasked by the Maryland Legislature to analyze the state's pension and retirement benefit liabilities situation and to make recommendations on how to sustain the state's pension and retirement benefits systems, the Commission now has two October meetings under its belt.And as the most recent Commission meeting presentations (available online) make clear, Maryland has a serious pension liability problem that is getting worse and which can't be ignored or solved by overly-optimistic investment returns.

A presentation to the Commission by the Department of Legislative Services' Office of Policy Analysis points out that Maryland pension liabilities are continuing to grow.Salary increases (including cost-of-living adjustments), a 2006 retroactive benefit enhancement that added $1.9 billion to the state's actuarial accrued liabilities, and rising life expectancies are all factors contributing to Maryland's approximately $31 billion dollar pension and retirement benefit liability deficit.Also a contributing factor is the state pension fund's annual asset investment losses of 5.4% and 20% in 2008 and 2009, respectively — significantly off from the system's optimistic asset investment return target of 7.75%.As the Office of Policy Analysis presentation concludes, it is already "too late" address the funding gap for fiscal year 2012.Rather, "[s]olutions designed to reduce current funding gap must address accrued liabilities."

Some of those solutions for addressing Maryland's growing pension and retirement benefit funding shortfalls have been discussed here in recentposts, including a transition for future employees from a defined benefit plan (where the benefit on retirement is determined by a set formula rather than investment returns) to a defined contribution plan (where the ultimate pension benefit is determined by investment returns).

Now, as a report at the Washington Examiner highlighted, a Commission meeting presentation by the Maryland Department of Budget & Management indicates that recently passed federal health care legislation and accompanying regulations will complicate, and perhaps restrict, pension reform efforts in Maryland.But whatever challenges new federal health care regulation poses, the Commission should not let those challenges derail the interim report it has been directed to issue to the Governor and Legislature in time for the 2011 Maryland legislative session.Although the Commission's Chairman was reported as expressing skepticism at its kickoff meeting over whether the Commission could meet its interim report deadline, an interim report doesn't need to define definitive solutions; it only needs to include initial steps for specific and actionable solutions that the Legislature has already put off for too long.

To paraphrase the conclusions of the Office of Policy Analysis: the problem is getting worse, and it's too late simply to deal with future fiscal year funding gaps.Maryland must begin taking action to address its accrued liabilities.And such action should be a top priority for the 2011 Maryland legislative session.